Pay for Organizational Performance

Two important ways organizations measure their performance are in terms of their profits and their stock price. In a competitive marketplace, profits result when an organization is efficiently providing products that customers want at a price they are willing to pay. Stock is the owners' investment in a corporation; when the stock price is rising, the value of that investment is growing. Rather than trying to figure out what performance measures will motivate employees to do the things that generate high profits and a rising stock price, many organizations offer incentive pay tied to those organizational performance measures. The expectation is that employees will focus on what is best for the organization.

These organization-level incentives can motivate employees to align their activities with the organization's goals. Linking incentives to the organization's profits or stock price exposes employees to a high degree of risk. Profits and stock price can soar very high very fast, but they can also fall, as witnessed by many wary investors. The result is a great deal of uncertainty about the amount of incentive pay each employee will receive in each period. Therefore, these kinds of incentive pay are likely to be most effective in organizations that emphasize growth and innovation, which tend to need employees who thrive in a risk-taking environment.

2012,India: Wipro company has tweaked the variable pay structure for its IT (Information Technology) and BPO (Business Process Outsourcing) employees. the company's annual meeting top management decided to attached their variable pay with organisational performance Linked to the customer satisfaction, this decision made clearly visible how much employee earns.

1. Profit Sharing

Under profit sharing, payments are a percentage of the organization's profits and do not become part of the employees' base salary. Organizations use profit sharing for a number of reasons. It may encourage employees to think more like owners, taking a broad view of what they need to do in order to make the organization more effective. They are more likely to cooperate and less likely to focus on narrow self-interest. Also, profit sharing has the practical advantage of costing less when the organization is experiencing financial difficulties. If the organization has little or no profit, this incentive pay is small or nonexistent, so employers may not need to rely as much on layoffs to reduce costs.

An organization setting up a profit-sharing plan should consider what to do if profits fall. If the economy slows and profit-sharing payments disappear along with profits, employees may become discouraged or angry. One way to avoid this kind of problem is to design profit-sharing plans to reward employees for high profits but not penalize them when profits fall. This solution may be more satisfactory to employees but does not offer the advantage of reducing labour costs without layoffs during economic downturns.


The primary objectives of profit-sharing plans are to:

    • Improve productivity

    • Recruit or retain employees

    • Improve product/service quality

    • Improve employee morale

2. Employee Stock Ownership Plans (ESOPs)/ Employee Stock Option

An employee share ownership plan ("stock option" or "stock ownership", abbreviated to "ESOP") is the practice of companies giving staff members shares in their company as part of their salary and "stock option" plan converts an employee in to a shareholders of an organisation. Today, employee stock option plan has become an employee retention tool/strategy for the organisations, especially in the information technology sector.

Social networking companies like, Facebook offered "stock option" to its employees those who stick to the company for a period of two years. similarly, Twitter, Google and Amazon have included stock option in the compensation package of their employees. Management experts feel that stock option is showing positive influence on retention of employees and termed it as a "Golden Handcuff ".

The stock option is the most popular long-term incentive. A stock option plans grant to employees the right to purchase a specific number of shares of company stock at a specific price during a period of time. The price at which the employee can buy the stock is equal to the market price at the time the stock option was granted. The assumption is that the price of the stock will go up, rather than go down or stay the same. Several trends have increased the attractiveness of stock options as a long-term executive incentive and retention tool.


Suppose that in 2009 a company's employees received options to purchase the company's stock at $10 per share. The employees will benefit if the stock price rises above $10 per share, because they can pay $10 for something (a share of stock) that is worth more than $10. If in 2012 the stock is worth $30, they can exercise their options and buy stock for $10 a share. If they want to, they can sell their stock for the market price of $30, receiving a gain of $20 for each share of stock. Of course, stock prices can also fall. If the 2012 stock price is only $8, the employees would not bother to exercise the options.

An Employee Share Option Plan (ESOP) is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for, thereby increasing their commitment, loyalty, and effort. It is an equity based deferred compensation plan. Under the ESOP plan, companies provide their employees the opportunity to acquire the company's shares at a reduced price over a period of time.

Apple Computer, Wang Laboratories, AirTouch, Bristol-Myers Squibb, Nike, Quaker Oats, and Sara Lee. all of these diverse organizations offers a stock option program to its employees.

According to the National Center for Employee Ownership, an estimated 15,000 firms in the United States have established broad employee-ownership programs. Of these firms, about 10,000 have formed ESOPs, covering about 9 million workers.

In recent years, many organizations pushed eligibility for options further down in the organization's structure. For example, it is estimated there are 1,000 Google employees who have become millionaires from stock grants and options.

Important goals of the plan are:

    • to attract best talented employees.

    • Acts as a retention tool.

    • to motivate employees to act in the best interest of the organisation as a whole;

    • to enhance employee identification with the organisation; and

According to WorldatWork, a compensation association, the use of stock options has become a very prevalent method of motivating and compensating hourly employees, as welt as salaried and executive personnel.

NIIT Technologies leadership team gets ESOPs worth Rs 1 crore (10 million)

July, 2012: Compensation Committee of Global IT services and software solution NIIT Technologies Ltd, India. granted 33,000 employee stock option (ESOP) to its Selected top 10-11 employees in three equal instalments. one third (i.e. 11000 stock options) granted would be given after the completion of one year. Next 11000 stock options would be given after the completion of second year and the rest would be given after the completion of third year.


An organization establishes an ESOP by using its stock as collateral to borrow capital from a financial institution. Once the loan repayment begins through the use of company profits, a certain amount of stock is released and allocated to an employee stock ownership trust (ESOT). Employees are assigned shares of company stock kept in the trust, based on length of service and pay level. On retirement, death, or separation from the organization, employees or their beneficiaries can sell the stock back to the trust or on the open market, if the stock is publicly traded.


Establishing an ESOP creates several advantages. The major one is that the firm can receive favourable tax treatment of the earnings earmarked for use in the ESOP. Second, an ESOP gives employees a “piece of the action” so that they can share in the growth and profitability of their firm. As a result, employee ownership may be effective in motivating employees to be more productive and focused on organizational performance. In one survey of over 1,100 ESOP companies, about 60% said productivity had increased, and 68% said financial performance was higher since converting to an ESOP.

Almost everyone loves the concept of employee ownership as a kind of “people’s capitalism.” However, the sharing also can be a disadvantage because employees may feel “forced” to join, thus placing their financial future at greater risk. Both their wages or salaries and their retirement benefits depend on the performance of the organization. This concentration is even riskier for retirees because the value of pension fund assets also depends on how well the company does.

Another drawback is that ESOPs have been used as a management tool to fend off unfriendly takeover attempts. Holders of employee-owned stock often align with management to turn down bids that would benefit outside stockholders but would replace management and restructure operations. Surely, ESOPs were not created to entrench inefficient management. Despite these disadvantages, ESOPs have grown in popularity.

Facts [+]

Employees prefer bonus to ESOPs in compensation: Experts

With a number of start-ups collapsing mid-way, many employees are now preferring bonuses instead of Employee Stock Option Plans (ESOPs) as part of their compensation package, industry experts said. Industries like pharmaceuticals, banking and IT companies are few who offered ESOPs to employees.

In the world of start-ups talent war was natural where every company wanted to hire the best and to attract them, ESOP was used as a component. However, with many start-ups collapsing gradually employees started relying on cash component. Hence, employees are now seeking bonus options. Bonuses are generally short term component, paid either yearly or quarterly, and is becoming an attractive option even if it is one-third or one-fourth of the value as compared to the ESOPs

It has seen a change where the ESOP component in compensation packages has dropped in start-up companies. This is because they never reach the valuations they initially project and in the past year a lot of start-ups also had to close businesses. Since around end-2016, it has been witnessing a change from ESOPs to variable bonuses in terms of compensation in these companies.

As the start-up world continues to see more uncertainty, employers prefer more stability and therefore, also prefer bonuses as compared to ESOPs, which is usually offered to middle and senior-level employees, he added.

This trend is seen across the start-up industry, including e-commerce, food, technology, logistics and financial services.

The Domino's Pizza chain focused on its store managers to reduce worker turnover from a staggering 158% down to 107%, according to a article. To accomplish this, Domino's HR department deployed a store manager strategy of hiring more selectively, coaching them on how to create better workplaces, and motivating them with the promise of stock options and promotions.